Cherry v. Howell

• Decision Date: 12 September 1933
• Docket Number: No. 231.,231.
• Citation: 66 F.2d 713
• Parties: CHERRY et al. v. HOWELL et al.
• Court: U.S. Court of Appeals — Second Circuit

66 F.2d 713 (1933)

CHERRY et al. v. HOWELL et al.

No. 231.

Circuit Court of Appeals, Second Circuit.

September 12, 1933.

Ernst, Fox & Cane, of New York City (Jerome Michael and Pincus Berner, both of New York City, of counsel), for appellants.

Harper & Matthews, of New York City (Harold Harper, of New York City, of counsel), for appellee.

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

This suit was begun in the Supreme Court of the State of New York, County of Queens, and removed into the court below. The plaintiffs are two out of a large number of persons who own class D bonds of Southern Guarantee Loan Company, a Georgia investment corporation. The named defendants are two of the corporation's directors who held office during the years in which occurred the transactions complained of. Only Clark Howell was served. The suit was originally instituted as an action at law brought on behalf of the plaintiffs and all other holders of the corporation's class D bonds. Judge Campbell dismissed the complaint on the ground that it stated a cause of action for fraud and deceit practised upon the class D bondholders individually, and that a class action would not lie. Leave was granted the plaintiffs to amend. Pursuant thereto, they filed an amended complaint which they contend states a class action in equity. A motion to dismiss the amended complaint came on before Judge Byers, who apparently held that the amendment merely stated more elaborately the same facts which Judge Campbell had held insufficient in dismissing the original complaint. An order was entered dismissing the amended complaint with leave to file "a second amended complaint within the purview of the said opinion" of Judge Campbell. (D. C.) 4 F. Supp. 597. Thereafter the suit was transferred from the law side to the equity side of the court, and, no further amendment being made, the decree of dismissal was entered which is now before us on appeal.

The amended complaint purports to set forth five causes of action, all of which are brought by the plaintiffs on behalf of all class D bondholders. Briefly summarized, the important allegations of the first count set forth the following: Until April 1, 1929, Southern Guarantee Loan Company was engaged in the business of issuing to the investing public its interest-bearing installment bonds on a monthly payment plan, and of investing the funds thus derived. On that date it ceased business and applied to a Georgia court for dissolution and the appointment of a receiver. It had outstanding a series of class D $600 ten-year bonds upon which the holders thereof, several hundred in number, had paid $5 monthly installments aggregating more than $1,000,000. During the years 1920 and 1922 two of such bonds were issued to plaintiff Cherry and 12 to plaintiff Smith, and each had paid the required installments up to April 1, 1929. By the terms of class D bonds, out of each $5 monthly installment, the company was obligated to apply $2 to the reserve fund and $2 to the redemption fund. It is charged that these sums, aggregating 80 per cent. of the total amount paid in on class D bonds, were paid to and received by the company in trust to be held for the uses and purposes stated in the bonds, but that the company in violation of its trust and of the statutes of Georgia failed to establish and maintain such reserve and redemption funds, and that the defendants and other officers and directors of the company knowingly "permitted and caused" such breaches of trust by the corporation. It is also averred that had such reserve and redemption funds been established and maintained, they would have constituted security for the payment of class D bonds, but the defendants negligently permitted and caused the owners of class D bonds to lose such security, and that nothing has been or will be distributed to them, since the company's assets in the receivership do not exceed the claims of secured creditors and the costs of the receivership. It is alleged that the company is indebted to class D bondholders in the aggregate amount paid in by them with interest, that the matters involved in this suit are of common interest to all class D bondholders, that it is brought to avoid a multiplicity of suits, and that the class D bondholders, including the plaintiffs, are without an adequate remedy at law. There are also allegations that at all times between April 1, 1919, and its cessation of business the corporation was insolvent as the defendants well knew, and that, with their connivance, it never complied with any of the statutory provisions relating to investment companies.

Each subsequent count of the amended complaint incorporates everything alleged before. The second count adds an averment that the defendants knowingly permitted and caused the corporation illegally to dissipate the moneys paid to it in trust by class D bondholders by using the same to pay bonds of other classes and other obligations of the company.

The third count alleges that prior to April 1, 1919, the company had gone through the form of establishing a redemption fund and a reserve fund, but the defendants knew that they had not been established or maintained, and that it was not intended to establish or maintain them, as required by the term of class D bonds. The contents of the funds as they existed on April 1, 1929, are set forth, and it is charged that the defendants permitted and caused the securities carried in these funds to be carried on the company's books at inflated values. With knowledge of these conditions the defendants permitted the company to collect over $1,000,000 from class D bondholders.

The fourth count alleges that the defendants knowingly permitted and caused the company to represent to the investing public that it was solvent, and was maintaining the redemption and reserve funds as required, and that such representations were false and fraudulent, and were innocently relied upon by the plaintiffs and other class D bondholders in subscribing for their bonds and paying installments thereon aggregating more than $1,000.000.

The fifth count adds allegations of conspiracy by the defendants to do the things of which the plaintiffs complained in the prior counts.

The prayer for relief asks an accounting by the defendants for the moneys paid to the company by class D bondholders between April 1, 1919, and April 1, 1929, which should have been held in trust in the redemption and reserve funds but were diverted therefrom, and for other appropriate relief.

The appellants assert that the amendments transformed the original complaint from a suit at law into a suit in equity and that the first three counts state equitable causes of suit "for participation in a breach of trust and for equitable fraud." If they do, so also did the original complaint. There is no material difference between the original and the amended complaints in this respect. It is argued by the appellee that Judge Campbell's decision was a holding that the complaint alleged no valid cause of action either at law or in equity, and that this ruling became the law of the case and requires an affirmance of Judge Byers' dismissal whatever the views of this court as to the sufficiency of the pleading. This contention cannot be sustained. Commercial Union v. Anglo-South Am. Bank, 10 F.(2d) 937 (C. C. A. 2), upon which the appellee relies, stands for no such doctrine. There it was held that after one district judge had sustained a complaint as sufficient, it was error for a second district judge to dismiss the complaint as insufficient. The situation at bar is very different. When Judge Campbell considered the complaint, the suit was pending on the law side of the court, no motion was made to transfer it to the equity side, and, so far as appears from Judge Campbell's opinion, the question whether the pleading presented an equitable cause of suit was not considered. It may, therefore, well be thought that Judge Byers was free to exercise an independent judgment on this question. But if Judge Campbell's decision were given the scope which the appellee ascribes to it, then Judge Byers followed it; he did not commit the error of overruling the decision of a judge of co-ordinate jurisdiction. The rule that this may not be done does not deprive the party aggrieved of his right to review a wrong ruling because it is a repetition of a previous erroneous decision of another judge in...